“Why Warren Buffett … The Obama Administration… T. Rowe Price … Even Big Oil Now Crave This $8 Company’s Revolutionary Technology
“… And how following their lead – right now – could easily triple your money within the next six months!”
So begins the new version of a teaser I’ve seen for months but never personally written about (this one was covered on the forum in a previous iteration). And why did I choose to write about it this time?
Well, there’s some company-related news that makes it relevant today — but I mostly got off my duff because they’re throwing out Warren Buffett’s name, which got them a lot more attention (if the emails from my readers are any indication) … and in so doing, they’re really pushing the envelope of legitimate name-dropping.
This is a water-technology company, and the ad is largely about desalination. They go into quite a bit of detail about the water shortages in the world, the declining aquifers and reservoirs, and the desperate need for more water for agriculture and various industrial uses around the world, including energy production and refining (let alone water to actually drink, which is a very small percentage of total use). I won’t bore you by repeating all that, though you can see the ad here if you want to catch up with the class. They call big oil’s interest in water and the growing demand that will place on this company’s products the “energy water nexus”
The ad, by the way, is from Nick Hodge for his Alternative Energy Speculator newsletter, which I’ve covered from time to time during its young life (I think it’s been around for a bit over a year), and as I said, they’ve been pushing the same ad in different forms for a couple months now (the shares have been mostly bouncing around between $6-8, though they did briefly dip down close to four dollars).
Now, almost all the ads I write about have a heavy dollop of hyperbole, and they usually try to draw a big picture of insatiable world demand and then cleverly channel that demand, no questions asked, straight into this company’s hypothetical coffers — and this one is no different.
“You see, thanks to one currently under-the-radar company’s revolutionary technology, we could soon feasibly create safe drinking water for every single person on the planet.
“In fact, it’s so cutting-edge that Forbes recently claimed, ‘[This] innovative technology can redefine the rules of supply and demand and change the marketplace.'”
Sounds good, right? But that word “feasibly” is a big one … and the quote from Forbes? That was about a different technology, a water harvester made by Aqua Sciences (a private company, I think) … still, the article did say, “Solutions like those developed by Aqua Sciences show that truly innovative technologies can redefine …” bla bla bla, so perhaps they can get off on a technicality.
They continue to push the envelope, though, when they bring in Warren Buffett — who owns only two companies that could feasibly be described as being in the “water” business, and this definitely ain’t one of them — and tease him and some other biggies, as they did in that first paragraph.
“I’m talking about firms like Berkshire Hathaway and T. Rowe Price… heck, even the Obama Administration and Big Oil are drooling over this company.
“And they’re all loading up for different reasons:
* “Uncle Sam’s eagerly depending on this technology to save Americans billions of dollars every-year in utility costs.
* “Big Oil’s investing to ensure their production costs stay low for decades to come.
* “The financial firms are beefing up their positions… firms like T. Rowe Price, Vanguard, and Berkshire Hathaway – who recently brought their stake in this technology to 32 million shares.”
Notice how they said “stake in this technology” instead of “stake in this company?” Yep, that’s because Berkshire Hathaway doesn’t own any shares of this firm (or at least, it didn’t own enough to warrant reporting those shares as of it’s last filing — and if Nick Hodge knows more than the SEC about Berkshire’s holdings, there’s a bigger problem).
Of course, Fidelity and T. Rowe Price and Vanguard all show up on the list of institutional investors for this company … but they pretty much own shares of almost every public company in the country, and their stakes here don’t appear to me to be notable. The company that appears to be the solution to this teaser, in fact, only has about 34 million shares in its public float (50 million shares outstanding in total), only half of which are owned by institutions.
Did we get into who the company actually is yet? No? Well, I guess I’m moving backwards again today, but let’s look at the actual details that do pertain to this company:
They call the firm “An All-Access Pass to the World’s Water Supply” because they can make desalination more feasible by cutting the cost…
“One company with the technology to increase desalination capacity while cutting desalination costs by as much as 83%.
“That’s right, this company’s exclusive product provides a sustainable, secure supply of water for just $0.70 per cubic-meter… “
And a bit more …
“And there’s little wonder why this company’s market share rocketed 151% between 2006 and 2007 (and that was after a 51% leap between 2005 and 2006).
“Now, this company is poised to dominate the entire water industry. No other company has the technology to compete… ”
More? You got it!
“But this one company (whose name I’ll give you in just a moment) has uncovered a method for extracting more water for less energy.
“And now this company… and it’s shareholders are making a fortune off the energy companies, governments, and agricultural industries desperate to get their hands on this breakthrough.
“GE, Veolia, and Doosan (just to name a few) are already in. And if you want to secure your share of this thing too – well, there’s no time to waste.”
The GE, Veolia and Doosan stuff is, at least, true and honest — those are three of the 80 or so partners they work with (and it would be awfully hard to be a supplier in the water business without working with at least GE and Veolia).
“This company is solidifying its global water monopoly each and every day.”
“Monopoly” is a pretty strong word — I would have used “market leadership,” even the company would agree that they do have some competitors in their niche.
And yes, there are a few more clues scattered about …
“This tiny company has perfected a method of producing more freshwater for less energy. It’s as simple as that.
“In fact, this company’s revolutionary technology is 98% energy efficient and cuts energy costs by 60% compared to the competition….”
“…this company has seen 55% growth every year since 2002…
“Even in 2008’s shaky market, this company turned a massive profit. It was actually a record-breaking year. The company’s net profit in 4th quarter 2008 alone was more than their total earnings in all of 2006… “
We can throw in that there was also a lovely chart in the teaser, showing 2008 revenue at almost exactly $50 million, and projected 2009 revenue in the high-50s, near $60 million. And they claim their device is 98% energy efficient, which sounds like a nice, high number.
So now can we talk about what company this is?
Sure … I agree with the folks on the forum, it pretty much has to be Energy Recovery (ERII)
This is a company that essentially makes one product, an energy recovery pressure transfer device that helps to make reverse osmosis desalination plants more efficient. It uses the pressure of the effluent to increase the pressure of the water going into the membranes, and that pumping and pressure is the key to fast and efficient throughput for most reverse osmosis membrane desalination systems. The 98% number relates to the fact that they lose almost no energy in the transfer process.
The product is called the PX Pressure Exchanger, and they sell it to the engineering and construction firms that design and build desalination plants, along with a few replacement parts and conversions where the part is added to existing facilities. According to their website it’s a fairly simple doodad with a ceramic core that won’t corrode and only one moving part, so they say it’s durable (which actually might be bad for recurring revenues, but helps to make the sale). They make them in a few variations based on the size and throughput needed, and they are either used alone or in trains.
There was a bit of a chat about these guys over on the forum a while back (it devolved into talk of bourbon, which is always fine by me), which I shared with subscribers of the daily update email back in April. Feel free to jump in there with a word, or to comment below if you have something to say about ERII.
So, we mentioned competition, right? Their big competitor for large-scale projects is apparently Calder AG, which is now owned by Flowserve (an old favorite of Louis Navellier, among others) — Calder’s sales last year were about half of ERII’s. They also have a few smaller competitors who they cite in their 10-K, FEDCO and Pump Engineering Inc., both of which apparently compete with versions of their Pressure Exchanger (neither is public). ERII believes they have the best and most durable product, and may well be able to back that up, which makes me a bit more comfortable with them (as does their long list of partner companies, and the installed base in existing plants that they can point to). That’s why I personally have a small options position in ERII, just as a bit of a speculation.
So what’s the bad news? Well, they’re expensive and newly public (theirs was one of the few IPOs last year), and they can have very lumpy earnings. Virtually all of their revenue comes from large desalination plant projects, and while there are a bunch of those in development there’s no guarantee that they’ll hit their numbers each quarter — especially if the weak economy slows down any of the big projects. They did, as teased, have higher revenues in the fourth quarter than they did in 2006, and they did pull in about $50 million for the year, with projections for 2009 currently at $60-65 million. The projected earnings for 2009 are 17-21 cents/share, so the current year PE is quite steep at 30+, though analysts do predict close to 50% earnings growth for 2010.
And of course, since ERII has built their market share largely based on an innovative product, there’s always the potential for one of their competitors to come out with something better … there’s a pretty long product cycle, since you want to test something for a few years and make sure it works really well before committing to it for a big desalination plant, but I have no idea what innovation might be in the pipeline at Flowserve or the other competitors. Having a single dominant product that’s in high demand is great and it helps investors to understand your company, but it also means you’re dependent on one product (well, one product family, at least), which can make you a little nervous.
So, as I noted, I generally like the theme of investing in water and water scarcity, and I have personally taken a small flier on ERII call options (the stock was down heavily yesterday), but there are lots of ways to invest in this space — from big players like GE or Veolia or Suez, or slightly smaller players like Hyflux, to other infrastructure and pump/part companies like Flowserve, to other filtration or chemical companies (like the water filtration/chemical company Berkshire Hathaway does own a big position in, Nalco holdings), or even water rights holders like PICO or JG Boswell (though I have a hard time trusting water rights as an investment, I can too easily see them usurped for the public good, and perhaps rightly so, though that’s a debate for another day).
My other current investment in this space is in an income trust that owns Chinese water treatment plants, but I’m always open to more investments in water. Oh, and Warren Buffett’s other “water” investment that I alluded to way back when we were young, at the beginning of this piece? General Electric, which is the 800 lb. gorilla in the water business … though it happens, also, to be unfortunately tethered to a flailing finance company.
And what’s the other reason that I chose today to share this with you? Well, besides the fact that the the shares came off their run a bit (it’s now more of a $7 company than an $8 one), they’re on a bit of a roadshow — company management is doing an analyst presentation today, and presenting at the Macquarie Infrastructure conference tomorrow, so now might be a good chance to check up on them and see what you think — you can access both presentations from their website here when they happen.
If you do listen to the presentations — or if you have looked into ERII before — please share with a comment below.
And if you’ve subscribed to Alternative Energy Speculator, please click here to review it for us — who knows, you might be able to help your fellow investors jump on the wealth express … or avoid a terrible wreck … your opinion matters.
Full disclosure: As noted above, as of this writing I own call options on ERII, and I also own shares of Berkshire Hathaway. I do not own any other stocks or investments noted above, other than Hyflux Water Trust, which I referred to obliquely, and will not trade in any mentioned investment for at least three days.
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